How to set up a private foundation?
June 14, 2005 10:00 AM   Subscribe

How difficult (and expensive) is it to set up a private foundation that can be named after someone and that can have control of charitable giving? Control to make sure the funds go to those that need them.

What are the legal and accounting expenses and and what would be considered the minimal funds needed to start such a foundation?
posted by jjcurtis to Law & Government (7 answers total) 1 user marked this as a favorite
First of all, what state are you in?
posted by Heatwole at 10:27 AM on June 14, 2005

Does your state have a Council on Foundations or similar group that works with grantmakers and grantseekers? If so, you might be able to ask them for advice. Generally, a foundation or trust gives away 5% of its total funds; they must give a certain percentage by law, though many give more.

Some questions to ask as you're starting out: For how long are you planning to make grants? Will you have a board or staff, or will you convene biannually like most family funds? Is there a plan for investing your base funds? Who will oversee granting? What will be your criteria for proposals? Who will review them? How will grantseekers find you?
posted by hamster at 11:09 AM on June 14, 2005

I can't help you on the legal and accounting expenses, but here are some ideas about the big picture:

If you don't want to manage the foundation yourself, there are several options: private foundation services (Fidelity has such a service - I'm sure they try to sell you their investment management services as part of it); and established foundations that allow you to set up your own named fund.

In both cases, you provide the money and control the giving; they do everything else. An established foundation would itself be a not-for-profit organization, if that's important to you.
posted by expialidocious at 11:12 AM on June 14, 2005

Found an example of the second option: The San Francisco Foundation supports donor-advised funds (minimum $10,000) and also has a program that lets you build up the $10K over up to ten years.

I don't see anything about whether they charge for their services. But they don't invest your funds separately from everyone else's, so maybe all expenses are covered by their organization.
posted by expialidocious at 11:28 AM on June 14, 2005

The most difficult part of setting up any not-for-profit organization is filing the very lengthy initial application required by the IRS. This will take you a long time, and cost you a substantial amount in legal and/or accounting fees. Thereafter, you are looking at substantial annual accounting fees to file the annual report and to ensure that you've made large enough annual charitable gifts to avoid the penalties that private foundations pay if they try to accumulate too much wealth.

Unless you really have a lot of money (hundreds of thousands of dollars, at least, but more often over a million), you're much better off finding an organization that you trust to use the money in an appropriate manner and give it to them. These days, public charities have to disclose a lot of information on how much of their money actually goes to needy recipients as opposed to administration, fundraising, etc.

You can also make restricted gifts to many charities. These are donations made where the money can only be used for specified activities.
posted by anapestic at 11:30 AM on June 14, 2005

Unless you have a pretty big pile of money to put into this AND you want public credit (as well as requests for grants) lavished upon you, go with the Fidelity route or use a community foundation with "donor-advised funds" such as the SF mentioned. Under a community foundation you will still get semi-public credit, in their annual report, if you want it. You control who gets the money. Most of the time there are no start-up fees, and you can start with fairly small amounts ($5,000 at one I know). You don't need to comply with all the finicky details you'd have to deal with if you had your own foundation. And, with your own foundation, you would have to file a form 990 which is a public record, available online via Guidestar.
posted by beagle at 1:26 PM on June 14, 2005

Best answer: There are over 700 Community Foundations in the United States, Most accept donor advised funds. In almost all cases the Community Foundations charge a 1% annual fee for administering the funds. They are all 502(c)(3) public charities which means that as a donor you can take the maximum tax advantage. They provide the tax returns, investment counciling, and annual audits (that is where much of the fee goes.) As public charities and non-profit corporations (some are set up as trusts) they are subject to the rules and laws of IRS, the Treasury Department, and your state corporation Commission.

Setting up a fund could not be easier (they will all tell you to seek the advice of your famil;y and your own professional advisors.)

You may set very tight restrictions on the use of the earnings of your fund prior to making the gift. Once it is in place you may not alter those restrictions.

By the way, the 1% fee is taken from fund earnings, you pay nothing out of your pocket.

Community Foundations - the way to go.
posted by leafwoman at 1:53 PM on June 14, 2005

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